Uncertainty hangs over Abu Dhabi oilfields

Dubai, January 10, 2014

The long-term future of fields that produce about half Abu Dhabi's oil remains unclear with only one day of a 75-year partnership with western oil companies left to run.

Some of the world's largest energy companies - ExxonMobil , Royal Dutch Shell, Total and BP - have been pumping crude from the Abu Dhabi desert for decades, taking payment in oil.

From midnight on Friday, the 9.5 percent equity stakes that each held in the venture operating the fields will expire.

Abu Dhabi National Oil Company (Adnoc), which until now has held 60 percent in the venture, will assume sole responsibility for these fields, which produce around 1.6 million barrels per day (bpd), compared with total UAE production of around 2.75 million bpd.

Many of the western company staff are expected to remain on site to help keep them running smoothly while Abu Dhabi debates what do over the long term.

What the political elite will do with the fields that have turned Abu Dhabi from a struggling fishing and pearl farming economy into one of the world's richest oil exporting countries is far from clear.

Few outside the inner circles of the government of Abu Dhabi seem to know what is happening, but many industry observers believe the leadership is torn between sticking with the western companies, making room for some Asian newcomers, or pressuring Adnoc to go it alone without help from either group.

"I think in reality everybody, including Adnoc, is probably in the dark as to what is going to happen," a senior oil industry source in the UAE said.

"One thing is quite clear...none of the oil companies post the end of the concession have any rights because the contract has ended. They are not going to put any money in, so somebody has to take over the entirety and it only makes sense for Adnoc to do it."

Adnoc's director-general, Abdulla Nasser Al Suwaidi, said back in November 2012 that Adnoc would recommend that the Supreme Petroleum Council of Abu Dhabi (SPC) maintain the current partners, because they logically have the most knowledge and experience to manage them effectively.

The oil industry source said the oilfields would continue to run normally under Adnoc, while most of the foreign staff stay on site. But the western oil rivals who have been working together and with Adnoc since the 1970s would no longer offer any technical or commercial advice on getting the most out of the fields in the long term.

None of the companies vying to be part of the next phase of development would comment on the situation. Companies hoping to operate in Abu Dhabi's oil industry have to sign confidentiality agreements forbidding them from even acknowledging the existence of the agreements, one legal expert said.

SHORT TERM

Analysts at Deutsche Bank said on Thursday that the financial impact on the big four oil companies of losing an average of around 150,000 barrels per day of production at a fixed margin of $1.00 per barrel would reduce their earnings by around $50 million per year each.

The loss of their equity stakes under the Abu Dhabi Company for Onshore Oil Operations (Adco) concession could also shave around 3 percent off the European oil industry's aggregate production in 2014, Deutsche Bank estimated.

While the oil majors are no longer guaranteed this oil, Adnoc will now have to find buyers for output that previously had guaranteed takers.

Trading sources said in November that the state-run oil company hoped to sell the same volumes of crude to the same oil majors on one-year contracts while the Opec producer decides what to do with the fields, which until now were run by the Adco venture.

"They basically went back to everybody and said: 'How much are you willing to pay?," the oil industry source said. He said there was no guarantee that the western oil majors would agree to buy all the oil that they have been taking until now under the concession arrangement.

Abu Dhabi, the biggest of the emirates and by far the major oil producer, signed the 75-year agreements with western oil companies in January 1939. The government acquired a 60-percent share in the early 1970s and Adco was formed in 1978.

The concession system allows oil and gas producers to acquire equity in hydrocarbon resources. The Adco concession is the largest, with most of the output coming from five fields: Asab, Bab, Bu Hasa, Sahil and Shah.

In his comments, Christopher Gunson, the counsel at global law firm Pillsbury, said: "Along with the decision to open up Iraq's long-closed oil supplies to foreign contractors, the expiry of Abu Dhabi's 75-year concessions ranks as one of the most dramatic events to hit the Gulf's oil and gas sector over the last decade."

"With the fate of 5 per cent of world's total oil reserves in the balance, allied to the fact that 10 firms will be competing for a share of Abu Dhabi's large reserves, the chances that 2014 will witness a 'bidding war' between many of the major oil companies are sure to substantially increase, " he noted.

"Given that these concessions have been in place since 1939, changes to the shape of the overall market are sure to be significant and the region's major players will be watching closely to see what the future holds for a part of the Gulf that produces in excess of 3.5 million barrels of oil per day," he added.-Reutersand TradeArabia News Service